• Where an inheritance tax relief or exemption already applies, the government should consider removing any available capital gains uplift on death.

• Consider removing the capital gains uplift on death more widely, meaning whoever inherits the assets also inherits the historic base cost of the deceased investor.

• If the uplift is removed, there should also be a rebasing of all assets, perhaps to the year 2000. Gift Holdover Relief should be extended to a broader range of assets making it easier for individuals to give assets away during their lifetime.

4. Business reliefs

Business Asset Disposal Relief

Relief for the disposal of certain business assets against CGT has been available since the introduction of the tax in 1965. Currently, Business Asset Disposal Relief (formerly entrepreneur’s relief) can reduce the tax payable on the disposal of qualifying business assets, by taxing the gains at a special rate of 10 per cent, up to a lifetime limit of £1m.

There is clearly a policy judgement for government as to the extent CGT reliefs should be used to seek to stimulate business investment and risk-taking.

However, the idea that Business Asset Disposal Relief is an effective way of making such an incentive has been called in question. In his Budget speech in March 2020, Chancellor Rishi Sunak described Entrepreneurs’ Relief as: ‘Ineffective – with less than 1 in 10 claimants saying the relief has been an incentive to set up a business.’ It was at this time that the lifetime limit was reduced from £10m to £1m.

A separate tax rate for Business Asset Disposal Relief also adds further complexity to a CGT regime that already has multiple rates.

The OTS heard from respondents who said that risk-taking would be better encouraged by smaller upfront (cash) reliefs at the time an investment is made, rather than by an eventual reduction in a tax liability on disposal.

Enterprise Investment Schemes provide upfront Income Tax relief for external investors. They also encourage repeated investment via a deferral of CGT for those who wish to reinvest gains.

That said, it is accepted that there is a case for the existence of a relief in relation to retiring business owners, particularly those who founded or scaled up their company. Business Asset Disposal Relief in its current form however is far broader than this, and so would require reform were it to specifically target this specific objective.

Investors’ Relief

Investors’ Relief was announced at Budget 2016 as an ‘extension of Entrepreneurs’ Relief’ to external investors in unlisted trading companies.

The responses received from investor groups, accountants and lawyers as well as the OTS’s own survey told them that interest in this relief and take up is virtually nil.

OTS recommendations

• The government should consider replacing Business Asset Disposal Relief with a relief more focused on retirement. This could be achieved by increasing the minimum shareholding amount, so that the relief goes to owner-managers rather than more passive investors. The holding period could also be increased (10 years was suggested) to target the relief to those people who have built up their businesses over time.

• The government should abolish Investors’ Relief. If the government believe there is a remaining need to encourage investment in unquoted trading companies the OTS considers that it should explore other ways to do this.

Charlene Young is senior technical consultant at AJ Bell